By Joseph A. Giannone

NEW YORK, May 22 (Reuters) - Warren Lichtenstein's Steel Partners LLC is forging ahead with a controversial plan to convert its flagship hedge fund, Steel Partners II, into a publicly traded holding company in the face of opposition from shareholders calling for liquidation.

The New York-based firm told limited partners, in a shareholder letter dated Tuesday, that they have until June 5 to either approve its plan to convert the fund into shares in a listed company, Steel Partners Holdings, or elect to receive a share of the fund's assets. Both options will also distribute some cash.

"For myself and many of our investors, the option provided by Steel Partners Holdings is too compelling to ignore," Lichtenstein said in his investor letter, a copy of which was obtained by Reuters.

Steel Partners declined to comment.

The letter lays out the latest version of a plan initially disclosed to investors on New Year's Eve, as Steel Partners dealt with the fallout of a disappointing 2008. The Steel Partners II fund fell by more than 40 percent last year and then dropped 18 percent in the first quarter.

Steel Partners II had about $1 billion on March 20.

Faced with investor requests late last year to withdraw about half of the fund's assets, Lichtenstein proposed merging the fund into WebFinancial, a Steel Partners portfolio company, and then take it public.

The plan, he said, would let investors either stick with the fund as a unit holder, or cash out, without forcing Steel to sell assets at depressed prices.